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Balance of payments points to higher growth

Some misleading comments surrounding potential balance of payments constraints have been doing the rounds of late.

When analysing the mainstay of South Africa’s balance of payments, namely the trade balance, it becomes obvious that quite the opposite is true. The country is generating close to R500 billion in export earnings per quarter and this has been virtually matched by imports during the first two quarters of 2023, resulting in a small surplus on the trade account.

Due mainly to fairly large income payments to the rest of the world, the net result on the current account of the balance of payments has been a modest deficit– less than 3% of GDP. Thanks to the regular occurrence since last year of a sizeable surplus on the financial account, however, the net effect on the balance of payments has been close to zero. Clearly, no problem exists with regard to foreign exchange flows.

In addition to the simple arithmetic surrounding balance of payments trends, scaremongering amongst ill-informed commentators over the negative implications of a possible future trade deficit is also flawed in theory. Standard undergraduate economics teaches that a deficit on the current account of the balance of payments is not necessarily a negative economic phenomenon and vice versa.

Deeper analysis required

Relatively high imports of machinery and equipment (as being experienced this year by South Africa) are often a prerequisite for economic growth in a developing country, even though such a trend may be accompanied by a (usually temporary) trade deficit.

During the first six months of 2023, imports of machinery and equipment rose dramatically, representing 25% of total imports, its highest share since 2016. Mineral imports (which are mainly represented by oil and are involved in a permanent tussle with machinery & equipment for top import trade spot), amounted to 20% of total imports, its second highest level since 2014.

Both of these categories of imports are crucial to the expansion of productive capacity and economic growth, with the stellar performance of machinery & equipment imports also closely associated with higher investment in renewable energy by small and large businesses alike.

South Africa’s balance of payments is a clear reflection of a country where capital formation and economic activity in general are heading in the right direction – paving the way for higher growth.

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